Employee Retention Tax Credit: What a Contractor Needs to Know
John Forbes - HW&Co and Ivan Golden - Hahn Loeser & Parks LLP
Contractors whose operations were fully or partially suspended in 2020 due to COVID-19, or whose gross receipts for the second, third, or fourth calendar quarter of 2020 were less than 50% of their gross receipts for the same quarter of 2019, are eligible for a fully refundable Employee Retention Tax Credit ("ERTC') of up to $5,000 per employee. The deadline to claim the ERTC, with respect to calendar quarters in 2020, is June 30, 2021.
Congress recently extended the ERTC through December 31, 2021, and dramatically increased the amount of the credit. As a result, employers whose operations are fully or partially suspended in 2021 due to COVID-19, or who experience a greater than 20% decline in gross revenues in 2021, are eligible for an ERTC of as much as $28,000 per employee.
This article outlines how contractors and other employers whose operations were fully or partially suspended in 2021, or who experienced a decline in gross revenues, may qualify for an ERTC of as much as $5,000 per employee for 2020 and as much as $28,000 per employee for 2021.
The ERTC is a complicated provision, and eligibility for the credit can vary depending on an employer's particular facts and circumstances. We strongly suggest you seek advice from a tax professional regarding its application to your specific situation.
Who is an "Eligible Employer"?
To receive an ERTC, a contractor must qualify as an "eligible employer," which includes all members of a controlled group under Internal Revenue Code Section 52 (greater than 50% ownership test) or Section 414(m) (affiliated service group) on an aggregated basis. The definition of an eligible employer varies for 2020 and 2021.
For the second, third, and fourth calendar quarters of 2020, an eligible employer is one that:
- Fully or partially suspended its operations due to a governmental order limiting commerce, travel, or group meetings due to COVID-19, or
- Had gross receipts for such quarter that were less than 50% of its gross receipts for the same quarter in 2019.
For each calendar quarter of 2021, an eligible employer is an employer that:
- Fully or partially suspends its operations due to a governmental order limiting commerce, travel, or group meetings due to COVID-19, or
- Has gross receipts for such quarter that are less than 80% of its gross receipts for the same quarter in 2019 or the immediately preceding quarter.
Amount of the ERTC
The amount of the ER TC likewise varies for 2020 and 2021. For the second, third, and fourth calendar quarters of 2020, an eligible employer may receive a credit equal to 50% of the first $10,000 of Qualified Wages paid to each employee in aggregate for all quarters, or a maximum of $5,000 per employee. For 2021, Congress increased the ERTC to 70% of the first $10,000 of Qualified Wages per employee, per quarter- or a maximum of $7,000 per employee, per quarter, and $28,000 per employee, per year.
Definition of "Qualified Wages"
What counts as "Qualified Wages" is different for small and large contractors. The definitions for "small" and "large" contractors are also different for 2020 and 2021:
Small Contractor:
For 2020 2nd, 3rd and 4th calendar quarters (for 2nd quarter, including March 13 - March 31, 2020): For 2019, averaged 100 or fewer full-time employees (30 hours per week or 130 hours per month).
For 2021 all four calendar quarters: For 2019, averaged 500 or fewer full-time employees.
Large Contractor:
For 2020 2nd, 3rd and 4th calendar quarters (for 2nd quarter, including March 13 - March 31, 2020): For 2019, averaged more than 100 full-time employees.
For 2021 all four calendar quarters: For 2019, averaged more than 500 full-time employees.
For small employers, all wages and Qualified Health Plan Expenses paid for all employees during the quarter are considered Qualified Wages. For large employers, only wages and Qualified Health Plan Expenses paid to employees for periods that the employee was not performing services are Qualified Wages.
"Qualified Health Plan Expenses" are amounts paid or incurred by a contractor to maintain a group health plan that are allocable to Qualified Wages. Thus, Qualified Health Plan Expenses include both pre-tax employee contributions and employer contributions to the plan. Even if no wages are paid to an employee, but health plan coverage is provided (e.g., coverage is continued for furloughed employees), the expenses constitute Qualified Health Plan Expenses and, as such, are Qualified Wages.
ERTC Interaction with the Paycheck Protection Program
Contractors that received Paycheck Protection Program or "PPP" loans are eligible to claim ERTC with respect to Qualified Wages. However, the same wages cannot be used to qualify for both forgiveness of a PPP loan and as ERTC Qualified Wages. Three possible scenarios in which an employer can qualify for both a PPP loan (with full forgiveness) and an ERTC include:
- A controlled group member received a PPP loan, and another member of the same controlled group that did not receive a PPP loan wishes to claim an ERTC;
- An employer received a PPP loan and also paid Qualified Wages with funds that were not received in connection with the PPP loan; and
- An employer received a PPP loan for which loan forgiveness was not obtained, and the employer used the same wages to pay ERTC Qualified Wages.
The best case 2020 scenario of a·$5,000 ERTC per employee combined with the best case 2021 scenario (all four calendar quarters of 2021) of a $28,000 ERTC for a total refundable credit of $33,000, represents significant assistance to contractors that meet the eligibility requirements of either a suspension of operations or a significant decline in gross receipts.
Contractors need to be mindful of the impact of the 11 controlled group" concept. In that regard, a contractor becomes eligible either by any member of its controlled group experiencing a complete or partial suspension of operations or based on the gross receipts of the entire controlled group.
See an ERTC decision tree to assist in your understanding of ERTC eligibility for 2020 and 2021.
John Forbes, CPA, CCIFP
Principal
HW&Co.
[email protected]
Ivan Golden
Partner
Hahn Loeser & Parks LLP
[email protected]